April 2003

Making India Inc angry

R Gopalakrishnan, exectutive director, Tata Sons, dissects the challenge of making India the manufacturer to the world from the managerial viewpoint

Professor Mashelkar once said that if we fail to transform, India will be a rich country where poor people live. He went on to wonder whether India would respond only when challenged. When our national pride was hurt in the mid-60s, we successfully launched on a green revolution. In the late 1980s when we were denied the Cray super computer for weather forecasting, C-DAC was mandated to design the Param supercomputer, and they did. The Washington Post reported it with the headline 'Angry India Does It'. The challenge is for Indians to get permanently angry: only then will we head somewhere.

India cannot accelerate GDP growth through dominant reliance on services. India definitely needs to leverage its opportunities as a manufacturing powerhouse with a wide employment, skill and income base emerging out of it. Economists and consultants speak about manufacturing with complex charts and statistics! I would like to bring a managerial perspective to the subject.

The societal dimensionManufacturing is usually associated with innovation and technology. However, the strong connection with the social milieu is often not recognised because society absorbs or rejects technology. Some societies absorb and encourage multiplication of technology, others control or even stultify it. For example, historically China had developed printing, paper, gunpowder, the compass and several innovations long before the West - but those remained ideas with incremental application. At that time, Chinese society was dominated by the mandarin bureaucracy whose sole aim was to absorb just as much technical innovation as could be absorbed into the existing social order. India too had several innovative ideas, but perhaps our orientation was to the intellectual power of the idea more than a focus on technical exploitation and economic value. Even Leonardo da Vinci had conceived notions for flying machines and submarines, but in the conditions of the 16th century, his ideas could not develop due to the unavailability of capital, materials and skills. Two centuries later, when Scottish craftsman James Watt had ideas about a steam engine, he was fortunate to find Birmingham industrialist, Mathew Boulton, who could supply the capital, machinery and skilled craftsmen.

Eric Hobsbawn points out that it is rightly assumed that an economy of private enterprise has a bias towards profit rather than innovation. It will revolutionise manufacturing only if greater profits are to be made in this way than otherwise. Even in pre-industrial Europe, the available and prospective customers for manufactures consisted of the rich who required goods in small quantities. This required the manufacturer to have high profit margins. Thus the middling sort of customers were kept out of the market through a self-fulfilling logic of small volume, high prices, narrow customer base. A millionaire in mid-19th century France, which at that time was not very industrial, expressed this sentiment. "There are three ways of losing your money - women, gambling and engineers. The first two are pleasanter, the last is much more certain." Industrialisation changed all that because private enterprise could not act in a manner that advanced its markets and consequent profit opportunities.

When Henry Ford produced his Model T in 1906, he also produced what had not existed before, namely a vast number of customers for a cheap, standardised and simple automobile. When Karsanbhai Patel produced Nirma in 1971, he created middling customers for a more convenient and cheaper clothes wash than the then available laundry bar soap. When the Tatas produced the diesel Indica in 1999, a segment of car owners was created who could take the family out on four wheels for a fuel cost per kilometre that was only two-thirds of the most inexpensive car in the market. Put another way, you could drive your diesel Indica for a fuel cost per kilometre of taking out two-and-a-half motorcycles. That is five wheels in all, whichever way you view it!

In my experience, there is a positive tension between manufacturing and marketing. Notwithstanding that, my somewhat contrarian view is that India can accelerate manufacturing growth only through a focus on markets and marketing. Generically, domestic and export markets grow due to four reasons:

(a) growth of population;(b) transfer of people from non-monetary to the monetary economy;(c) an increase of per capita income;(d) adoption of industrially produced goods for older forms of manufactures.

All these four conditions are available to Indian manufacturers. What is lacking is the social milieu and the mindset - among government, industry, economic planners. We need a market expansion mindset. This mindset issue is reflected in the statistic that the contribution of manufacturing within GDP is lower in India than other developing countries.

Over the last 20 years, from 1979 to 1999, manufacturing contributed just 16-17 per cent to national GDP. The corresponding figure is higher for Mexico, Philippines, Malaysia, China and so on. In several cases like Thailand, Malaysia, Korea and China, the percentage is increasing over each decade.

The productivity issueThe contribution of industrialisation to national economic growth in India has followed patterns seen in other countries. However, India is dissimilar insofar as industrial growth has not been accompanied by productivity growth. Part of the reason may be our mindset, which is not productivity-oriented but more production-oriented. Another part is that we have followed broad-front industrialisation rather than specialising in targeted sectors. I will amplify this.

In the post-war period, growth rates of industrial output in developing countries exceeded those achieved by developed countries at their corresponding stage of development which was the turn of the last century. Thus, there has been compression in the timeframe for industrialisation among the developing countries. This has been attributed to government intervention, particularly during the 50s and 60s, through policy measures such as import substitution, public investment, development of heavy industry, etc. India's experience has been both similar and dissimilar. India too saw significant government intervention. But India's industrial growth rate was lower than peer developing countries. More importantly, whether it was the NICs of East Asia or the developed countries at their corresponding stage of development, their industrial growth was accompanied by productivity growth, thus shifting both output and employment towards the industrial sector. This has not been the case with India. Manufacturing can have a positive role in our economic growth only if it can achieve a simultaneous growth in productivity. If this has not happened in our case, one reason could be our mindset that is obsessed with production more than with productivity.

Post liberalisation, India faces a tough challenge - there is no doubt about that. Today, a decade after the first flush of economic liberalisation there is a healthy debate going on about increasing levels of productivity in Indian manufacturing; about achieving international levels in cost and quality. Issues that are being scrutinised range from improving efficiencies, cutting costs and putting assets to better use to take on foreign competition and very importantly offer better products and services to domestic consumers.

If we just look at productivity, you will find that no clear pattern emerges from all the studies that have been conducted so far. One study based on ASI data covering a period of 26 years (1973-74 to 1997-98) for the manufacturing sector points to an improvement in TFP, which increased at an annual rate of 3.7 per cent in the period under review. An IMF study points out that labour and TFP growth during the 1980s were higher vis-à-vis the preceding two decades and productivity growth for manufacturing and many of its segments accelerated during the 1990s. Yet another study taking a contrarian view indicates a barely positive or even negative TFP growth rate for Indian manufacturing over a period of 16 years (1980-81 to 1996-97). This may not be surprising. If all of a sudden we had managed to improve the productivity of the aggregate Indian economy in the last 10 years when we have not been able to achieve it in the last 50 years, we would be geniuses!

Whenever we speak of manufacturing growth and enhancing productivity, our tendency is to harangue the government. The belief is that productivity will improve only after policy makers undertake reforms in the areas of transport, infrastructure, power and so on. However, we need to get on with our actions without waiting for government, we need to look inwards at the firm level. Two thoughts:

Seek productivity improvements continuouslyWe need to urgently recognise, communicate and manage the need for rapid and substantive change within the organisation by benchmarking against 'best-in-class' and communicating extensively within the organisation to convey the burning platform and establishing sponsorship for change initiatives. Being market-driven will lead to the re-engineering of core processes to dramatically improve efficiency and drive business value by enhancing marketing processes and capabilities, with an emphasis on consumer understanding and product development processes. In addition, focus on improving supply chain processes.

Focus on a few areas to become world-classIndia's manufacturing can play a powerful role only if the firm can focus preferentially (not exclusively) on certain industries / segments in which it can become world class. Germany is known for high performance cars, Korea for compacts and sub compacts. Japan is strong in general purpose machinery while Italy is known for specialised machines such as leather-working machines and high-speed packing lines. Taking a strategic approach, what are the FWCMs (Focused World Class Manufactures) that India can consider? We can focus on sectors with natural competitive advantages. For instance, endeavouring to make India the global auto-component hub by leveraging the lower product development costs, specialised design, forging and casting skills and expertise in small batch manufacturing.

It is also necessary that in the manufacturing industry clearly articulated criteria must exist to pre-select the potentially competitive industries for the country. As the Indian manufacturing sector restructures and imbibes newer technology, it is becoming less of an employment generator. Hence, certain propeller industries which have natural advantages, multiplier linkages and ancillary employment, can be identified and strategically promoted - like the automobile industry, food processing, pharma, textiles, leather, etc. Promotion of such sectors would fulfill the twin aim of enhancing India's share in manufacturing export and promote employment. For these pre-selected industries, it is obvious that a planned and calibrated development strategy will be required as already indicated.

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